How Do You Divide the Stuff in a Divorce?
By stuff, I mean vehicles, homes, bank accounts, credit cards, and IRA’s. What is the easiest and fairest way to do this?
Let’s say you and your spouse agree to the divorce as long as everything is evenly split. Categorizing, valuing, and then dividing. This is the easiest method divorce attorneys have for dividing community property. At our firm we like to place community property, the property acquired during the marriage, into categories, value the things placed into the category, and then divide the category evenly.
Categorizing is first. One category is “NO” tax assets. Another is “WITH” tax assets. A third category is personal property. A fourth category might be unsecured debts, like credit cards. Debts are not always a category, as sometimes the debts can be subtracted from an asset before dividing. A little more on dividing debts shortly because the name on the debt can make dividing slightly more difficult.
A debt on a house is secured, and not really a debt unless the debt is more than the value of the home. If the debt is less than the value of a home, there is equity to split. Equity is the difference between the debt and the value of the property. Equity is a “NO” tax asset that should be divided evenly.
“NO” tax assets would be property purchased with after tax money. Your home, your car, savings accounts, or investment accounts that were purchased with money you already paid taxes on. Assets “WITH” tax issues, like an IRA, 401(K) or pension, are still subject to federal and state taxes. After placing the “NO” tax assets together, find out the value of the assets, and then divide evenly. We have a marital balance sheet which helps with this.
Next, do the same thing with “WITH” tax assets. Pensions, IRA, and 401K’s are your typical assets. The reason we don’t mix these assets into the same category as “NO” tax assets is they are not worth the same. An IRA worth $30,000 still has tax implications, and should not be in the same category with a $30,000 bank account. The IRA cannot be liquidated without paying taxes, and/or penalties. The tax or the penalty doesn’t matter if we have them in their own category. Each spouse is equally sharing in the taxes and penalties. After you place the “WITH” tax assets into a category, you can divide them evenly. Most spouses divide the 401K by each keeping their own. But, if there is a big difference between balances they may need to be divided.
Finally, the category for personal property. Personal property is movable items like tools, artwork, furniture, jewelry, guns, rugs, audio equipment, etc. You can place all the personal property in a category, value it, determine who’s taking what and then equal out the difference in the value. There is another method for dividing personal property. It is called an A/B list, and is a little simpler than valuing.
One spouse puts all the personal property onto two lists. Once is called an A list and the other is called a B list. Each of the two lists should be of equal value, and the spouse making the list should be satisfied if he/she is awarded with either list. Then the other spouse chooses either the A or the B list and he/she is awarded the property on that list. The other spouse gets the property on the remaining list. You might have done this when your children argued over the last cookie. You have one child cut the cookie in half, while the other child chooses which half they want. The child cutting must make the cut equally or suffer with a smaller half. With the A/B list, one spouse must divide the property as fairly as they can, or suffer when the spouse chooses the A or B list.
Dividing debts by the value, and by whose name is on the debt, can be the tricky part. A debtor does not need to follow a decree. If you owe $50,000 in a credit card in your name, and the court orders it to be split $25,000 and $25,000, the credit card company is not obligated to follow this split. If your spouse doesn’t pay their $25,000 you are still obligated to the credit card company for the full amount. In situations like these you need a good divorce lawyer to add in language in the divorce decree to protect how the court divides the debts.
The overall goal in dividing the assets and debts is to categorize them, value them, and to divide them equally. Think of dividing a forest with different trees. You can’t just divide the forest in half. You need to divide the forest evenly by dividing the types of trees evenly. Tax issues, and aligning the debts with the name of the spouse of who actually owes the debts are the two hurdles to jump over. Most of the time it is possible, even if it takes a little creativity.